Watch out for 'price protection' in contracts with PBMs and GPOs

In the neverending battle over revenue growth and cost control, an old contracting technique—enforcing a maximum price (including discounts) has reappeared. That was the subject of a presentation by Eirik Olsen, senior director of DaVIZta, Inc. (Flemington, NJ). The relatively new company has entered the market as a provider of software solutions and services to perform analytics on life sciences customer contracts (a field that is called “revenue management” by some; “enterprise revenue dynamics” by others). Olsen presented his findings at the CBI Summit on Managed Care Market Strategies (Philadelphia, June 19-20).

Here’s how it works: when a new contract with a pharma supplier is written, the contract terms might include the usual discount or rebate elements, but in addition includes a maximum price for the drug, for the term of the contract. Normally, discount-only contracts will see drug prices rise as the list price rises; now, in effect, the price is locked in and any future price increases simply become a larger discount. The practice has become common among large pharmacy benefit managers (PBMs) and group purchasing organizations (GPOs).

There is little that is especially profound about this practice, except that if it is not factored into the analytics that manufacturers use to report government prices, other contracted prices, or how discounting is tied to yet other contractural terms (such as chargebacks to wholesalers, or calculations of price discounting to marketing campaigns), gross-to-net calculations and any revenue forecasting are thrown off. Olsen also raised the issue of a merger or acquisition: if the transaction price is based on an expectation of future revenue—that revenue might not appear.

DaVIZta has developed a suite of tools to analyze this practice, as well as the interlocking effects of price deductions, inventory agreements, class-of-trade terms and related pricing issues, all of which roll up into a process where, as the company literature puts it, “pricing and price deduction incentives and constraints must be forecast, evaluated and managed so the top line doesn’t collapse on the bottom line.”